Imagine you're a member of Congress. While you're accustomed to spending money hand over fist (and hand over every other part of the body, for that matter), you know deep down in your gut that the spending needs to gain some semblance of control. Now imagine that one of your staff brings to your attention a recent finding about a twist in Medicare managed care that could mean that the insurance companies running these programs are paid too much.
Your immediate response is, "Aha! Here's a way to cut costs that won't make me lose votes in the next election! We'll just pay those evil insurance companies less." You direct your staff to put together legislation to reduce Medicare spending. While, like many members of Congress, you won't actually read the bill that you vote for, you will feel good that you have helped taxpayers save money. As for those insurance companies, who cares?
This scenario could be played out in the halls of Washington, D.C. in the not-too-distant future thanks to a recent report from a researcher at the Centers for Medicare and Medicaid Services, or CMS. Here's the background -- and what it could mean.
Gerald Riley at CMS decided to look into what happens with members of Medicare Advantage plans who switch over to traditional fee-for-service Medicare. What he found was that these members incur costs nearly 28% higher than similar members already in fee-for-service plans. The members who were initially in Medicare HMOs had the biggest cost difference.
Another study published in December in Health Affairs found that members who left Medicare Advantage plans to join traditional Medicare were "much more likely" to report worsened health than other Medicare beneficiaries. However, according to the researchers, changes made to Medicare Advantage in 2006 that limited members to switching only once per year did help improve the situation.
Neither of these two reports suggested that organizations offering Medicare Advantage programs were somehow cherry-picking healthier members. The implication, though, is that insurers running Medicare Advantage could be benefiting financially by not having to pay higher medical costs for patients who switch to traditional Medicare.
Washington to the rescue
Don't think for a minute that politicians won't jump to find ways to "fix" this issue. Expect alternatives along two general lines of thinking.
One approach could be to try to force Medicare Advantage programs to offer fewer limitations, therefore becoming more like traditional fee-for-service. The problem with this approach is that such actions could undermine the principles of managed care that seem to be working.
Advocates for applying these principles to Medicare point to several examples of success. For instance, another report in the same issue of Health Affairs found that members of Medicare Advantage plans were admitted less frequently to emergency rooms, had fewer elective surgeries, and obtained some types of recommended care more often. Another study by the Agency for Healthcare Research and Quality concluded that members of managed-care plans were less likely to require hospital treatment.
A second approach for addressing the issue could be to simply pay less per enrollee to companies offering Medicare Advantage programs. The thought behind this option is to shift the cost of the sicker patients who leave the managed-care plans back to the insurance companies. The politics of this approach will probably make it an appealing one to take for many on Capitol Hill.
A twisting pain?
Do investors in insurers who run Medicare Advantage programs have reason to be concerned if either of these "fix it" approaches are taken? Probably so. Undermining the managed care principles behind Medicare Advantage would cause insurers' costs to go up. More federal reductions of payments would hurt revenue.
One insurer that would probably be hit particularly hard is Humana (NYSE:HUM). The company received 71% of its total premiums and service revenue from Medicare products in the first nine months of 2012.
UnitedHealth (NYSE:UNH) obtained around 29% of its premium revenue from CMS last year, most of which was for Medicare plans. WellPoint's (NYSE:ANTM) consumer segment, which includes its Medicare Advantage programs, accounted for nearly 32% of premium revenue in the first nine months of 2012. Cigna (NYSE:CI) is a little less exposed, with 25% of premium revenue during the first nine months of last year stemming from Medicare.All four insurers are growing their Medicare Advantage businesses.
These companies and their investors probably won't be the only ones experiencing pain, though. If profit margins for Medicare Advantage diminish, the most likely source for mitigating the damage will be to increase premiums for commercial insurance. That could mean that this new twist could have many employers and employees squirming.
Here to help
Maybe Congress will consider a third approach, though. The studies appear to indicate that Medicare Advantage plans are controlling costs, but some members who get sick are switching to fee-for-service. Another alternative is to develop incentives (either carrot or stick variety) to keep these patients in managed care programs. That could help lower overall costs in the long run.
Solving our nation's health-care cost problems won't be easy, regardless of which route is taken. However, in times like this, I can't help but remember the words from former President Ronald Reagan: "The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'"
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. The Motley Fool owns shares of WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.